GST: 1% additional tax dropped; states to get full compensation for first 5 years

New Delhi: The Cabinet on Thursday cleared changes in the GST Constitutional Amendment Bill, dropping 1 percent manufacturing tax and providing guarantee to compensate states for any revenue loss in the first five years of rollout of the proposed indirect tax regime.

The Cabinet, headed by Prime Minister Narendra Modi, decided to include in the Constitutional Amendment Bill that any dispute between states and the Centre will be adjudicated by the GST Council, which will have representation from both the Centre and states.

With states on board and the Cabinet approving the amendments, the government is hopeful of passage of the long-pending Goods and Services Tax (GST) Bill in the ongoing monsoon session of Parliament, which ends on August 12.

The GST Bill, with the changes approved by the Cabinet, could come up in the Rajya Sabha as early as this week, but certainly by next week.

The changes approved by the Cabinet are to the Constitutional Amendment Bill that was approved by the Lok Sabha in August last year. Once the Rajya Sabha approves the legislation, the amended Bill will have to go back to the Lok Sabha again for approval.

"The amendments to the GST Constitutional Amendment Bill have been cleared," a top official said after the meeting of the Union Cabinet chaired by Modi.

The amendments were taken up by the Cabinet after Finance Minister Arun Jaitley's assurance to state finance ministers to include in the Bill the mechanism of compensating states for all the loss of revenue for five years.

The Bill, in its present form, provides that the Centre will give 100 percent compensation to states for first three years, 75 percent and 50 percent for the next two years.

However, the Select Committee of the Rajya Sabha had in its report recommended 100 percent compensation for probable loss of revenue for five years.

As per the amendments, the Centre will now constitutionally guarantee states any loss of revenue from the GST subsuming all indirect taxes, including VAT, in the first five years of introduction.

By doing away with the 1 percent inter-state tax over and above the GST rate, the government has met one of the three key demands over which Opposition Congress has been blocking the Bill in the Upper House.

The other demands of including GST rate in the statute and a Supreme Court judge-headed dispute resolution body has not been accepted. It remains to be seen if meeting of its demands halfway will persuade the Congress to support the legislation.

There is a talk of mentioning the GST rate in one of the two supporting legislations that need to be passed after the Constitution is amended, a move that may pacify the Congress.

The government plans to roll out GST by April 1, 2017, and is working overtime to build consensus to get the Bill passed in the ongoing session.

With the Congress demand of getting GST rate capped in the Bill delaying its passage, the Centre yesterday built a broad consensus with the states that the rate should not be mentioned in the Constitution and instead could figure in GST law.

It was also assured that the tax rate in the new regime, which is to be decided by the GST Council, will be less than what it is at present.

"The amendments will pave the way for political consensus and early passage of the Bill in the monsoon session," EY National Leader (indirect tax) Harishanker Subramaniam said.

In the new regime, there will be one Central GST or C-GST and State GST or S-GST. States levy sales tax or VAT on goods sold within their jurisdiction and get a Central Sales Tax (CST) on sales made outside their territories.

This CST will no longer be available in the new regime and a 1 percent additional tax was proposed to make up for that.

GST being a constitutional amendment requires to be passed by Parliament with two-thirds majority and after that, 50 percent of state assemblies will have to pass the legislation.

Thereafter, the Lok Sabha and the Rajya Sabha will have to pass the central GST Bill and the states have to pass their own GST Bills.

After the legislative procedure gets over, the GST Council, which will be the decision-making body on all issues, including rates of the new tax, will come into play.

The Council will be chaired by Union Finance Minister, but Centre's voting share will be one-third and all decisions of the council would be taken by 75 percent majority.

Terming compensation guarantee as a very big development, Chairman of the Empowered Committee of State Finance Ministers Amit Mitra had yesterday said appropriate wordings on compensation would give confidence to the states regarding the Centre's intention.

"I cannot go into details of the wordings, I can only give you spirit of it. States are satisfied that in the constitutional amendment, the wording (will be provided) by which states will be guaranteed five years of compensation if there is any loss of revenue," Mitra said.

The GST Bill, which intends to convert 29 states into a single market through a new indirect tax regime, was earlier planned to be introduced from April 1 this year, but the deadline was missed as the legislation to roll it out remains in limbo in the Opposition-dominated Rajya Sabha.

If the legislation is passed in the current monsoon session of Parliament, it can be implemented from April 1, 2017.

The Congress, which first proposed the constitutional amendment in 2006, is demanding capping the overall rate at 18 percent and scrapping an additional 1 percent tax designed to compensate manufacturing-heavy states that fear losing out revenue once the measure is implemented.

After Parliament approves the constitutional amendment to allow GST, it needs to be ratified by more than half of states.

After the Constitution Amendment Bill is passed in Parliament, there are three more legislations - Central GST (CGST), State GST (SGST) and Integrated GST (IGST) - which are require to be passed.